Your credit score provides lenders, banks, and other creditors with an at-a-glance understanding of how likely you are to repay what you borrow. Lenders use your score to determine whether they should offer you a loan or line of credit, and your interest rate. Because these two factors can have a big influence on your financial life, it’s important to know how credit scoring works.
Here’s how credit scores are calculated and what you can do to improve yours.
How is your credit score calculated?
Credit scores are calculated by using information on your credit report such as the types of accounts you've opened and amounts owed, payment history, and length of credit history. Lenders communicate new information to credit bureaus—Equifax®, Experian®, and TransUnion®—that compile these reports, usually at least once a month. Your credit information can vary from bureau to bureau—some lenders may not report your credit information to all of the bureaus.
Your data is analyzed and weighted to provide a rating of your creditworthiness ranging from 300 to 850, with higher scores indicating you’re more likely to repay what you borrow, which can also qualify you for lower interest rates.
The main credit score formulas are FICO® and VantageScore®. They essentially use the same categories of credit data to compute your score, although each assigns different weights to the categories.
FICO score breakdown
- 35% payment history: This factor assesses how consistently you’ve paid your bills and if you paid them on time.
- 30% amounts owed: FICO considers factors such as how much money you owe across all accounts, and the difference between your owed balance and credit limit.
- 15% length of credit history: FICO verifies how long you've maintained your credit accounts. Generally, longer histories can help improve your score.
- 10% credit mix: Your credit history reflects the types of credit accounts you have such revolving credit (credit cards, retail accounts, and credit lines) and installment credit (mortgage and auto loans, and student loans).
- 10% new credit: This factor assesses your new accounts. (Opening several new accounts at the same time could indicate to lenders that you may have financial pressures or could stop making payments. However, new accounts that are managed properly could help restore poor credit history and increase credit scores.)
VantageScore 4.0 breakdown
- 41% payment history: This factor assesses the same data points as FICO, but with a slightly higher weight.
- 20% depth of credit: VantageScore combines the age of your credit accounts (or the length of your credit history) with the types of credit you carry (your credit mix) to determine your depth of credit.
- 20% credit utilization: This factor considers the type and length of time you've had your credit accounts.
- 11% recent credit: This factor assesses the same data points as FICO.
- 6% balances: This factor considers the total amount of debt you have on all of your credit accounts.
- 2% available credit: This factor considers the total amount of credit you have available on all of your credit accounts.
You may notice slight differences between your FICO score and VantageScore because each scoring models considers slightly different data points at different weights. Overall, your scores should be roughly the same between the scoring models.
What doesn’t affect your credit score
Credit scoring can sometimes feel like an opaque process, and there are some common misconceptions about what goes into calculating these scores. Neither FICO nor VantageScore use any of the following information to determine your score:
- Race, religion, national origin, sex or gender, or marital status: It is against the Equal Credit Opportunity Act (ECOA) for any of these factors to be considered in credit transactions, including credit scoring. The ECOA also prohibits discrimination against borrowers on public assistance or those exercising their rights under the Consumer Credit Protection Act.
- Age: Provided you are old enough to engage in legal contracts, your age cannot be used to determine your creditworthiness. However, it takes time to build your credit history, so if you’re very young your score may be impacted due to not having adequate time to establish a lengthy credit history.
- Occupation, employment history, salary, and total assets: Lenders may use this information to decide whether to lend to you, but neither FICO nor VantageScore use it to calculate your credit score.
- Residential location: Where you live does not affect your credit.
- Interest rates on current loans: This information is not reflected in your score.
- Credit counseling: Any information about your participation (or non-participation) in a credit counseling program will not affect your credit score.
- Child or family support obligations in "good standing": While overdue or delinquent family support payments are reported to the credit bureaus and included in your credit score calculations, your credit score does not include current family support obligations in good standing.
- Soft credit inquiries: “Soft” inquiries do not affect your credit score and include:
- Consumer-initiated inquiries, such as checking your own credit report.
- Promotional inquiries, such as to extend a pre-approved credit offer.
- Administrative inquiries, such as when a current lender reviews your account with them.
- Inquiries by employers that may check your credit report before offering you a job. They cannot, however, see your credit score.
How to maintain or increase your credit score
The steps you’ll take to increase your credit score are the same you’ll follow to maintain a good credit score once you’ve achieved it. Here are the most important strategies to follow:
- Pay all your bills on time. Consider setting up automatic payments so you’ve always paid by the due date. Enabling autopay might even get you a small discount from companies like your cell phone provider.
- Keep your balances low. Generally, you want to have a balance that is 30% of your credit limit or lower across all accounts.
- Keep old credit accounts open. It’s proof to lenders that you have a long credit history. It also increases the amount of available credit you have, which can improve your credit utilization rate. In some cases, a low credit utilization ratio will have a more positive impact on your FICO scores than not using any of your available credit at all.
- Don’t apply for multiple loans and credit cards at once. The hard inquiries can lower your credit score and might be a red flag to potential lenders that you’re financially overextended. Depending on your credit history, you may want to wait 3 to 6 months between applications.
- Keep an eye on your credit report and dispute any errors you notice. Common errors include a misspelled name, wrong address, accounts you didn’t open, or accounts incorrectly reported as late or in default. If you spot an error, dispute it with the credit bureau that listed the mistake.